Question

31. At the beginning of 2016, Scarlet Industries began providing a three-year warranty on its products. The warranty program was expected to cost Scarlet 2% of net sales, approximately equally over the three- year warranty period. Net sales made under warranty in 2016 were $270 million. Thirteen percent of the units sold were returned in 2016 and repaired or replaced at a cost of $2 million. This amount was debited to warranty expense as incurred. Required: Prepare the appropriate adjusting entry to adjust warranty expense on December 31, 2016. What is the warranty liability that should be shown on the balance sheet December 31, 2016? Show calculations

Answer 1

Answer:

(In million $)

Warranty expense a/c                  Dr. 3.4

          To Estimated Warranty Liability        3.4

( 270 x 2% ) - 2 = 3.4